COMMENT: Why it’s time to take a good, hard look at wealth inequality in Singapore

Sudhir Thomas Vadaketh is a writer. Together with Donald Low, associate dean for executive education and research at the Lee Kuan Yew School of Public Policy, Sudhir is the co-author of an upcoming book, Hard Choices: Challenging the Singapore Consensus, to be published by NUS Press in April 2014.

Singapore needs to address its drastic wealth inequality in order to, among other things, reduce social tensions, improve social mobility and maintain its commitment to building a fair and just society.

While there has been much discussion about income inequality in Singapore’s recent past, wealth inequality has garnered little attention. This is partly because of a paucity of official data. But a report on global wealth last year by Credit Suisse, an investment bank, suggests that Singapore has one of the biggest wealth disparities in the world.

Why worry?

In any capitalistic society, some inequality is desirable as the just rewards for differing effort, which incentivises people to work hard. But extreme inequality can be pernicious, justifying redistribution.

First, it disrupts an individual’s innate sense of fairness, and can cause people to lose faith in meritocracy’s fair workings.

Second, extreme wealth inequalities can lead to several economic inefficiencies, for example when people overspend on positional goods such as luxury cars at the expense of productive investments.

Third, a country’s democratic traditions are arguably under threat by wealth concentration. This is because a small group of rich people can wield undue influence on public policy. Fourth, there is a moral argument against obscene wealth accumulation.

Wealth inequality also threatens social stability—it has been at the heart of political upheavals from the French Revolution to the Arab Spring.

Do Singaporeans care about wealth inequality?

Singaporeans have traditionally been averse to wealth redistribution, partly because of the idea that focussing on equalising life opportunities is enough. When estate taxes were abolished in 2008, Singapore became one of the few countries that does not have capital gains (including property) or estate taxes.

And yet over the past few years, Singaporeans have become increasingly concerned about wealth disparities and less convinced by pro-wealth arguments.

Consider the idea that Singapore needs many wealthy billionaires in order to seed and grow businesses. This misunderstands the nature of entrepreneurship. Henry Ford and Bill Gates came from humble origins to build giant companies. Their descendants, billionaires, have not created anything similar. Much better for Singapore to foster a friendly investment climate and an open, innovative environment.

Finally, there is much evidence today about the lack of intergenerational mobility in this country. Many Singaporeans today subscribe to the school of thought encapsulated by Michael Harrington, an American political scientist, who in 1962 said that most poor people are poor because “they made the mistake of being born to the wrong parents”.

How should the rich give?

Government wealth taxation commonly takes the form of either taxes on capital gains and/or estate duties. Any tax policy must strike a balance between socially-acceptable wealth creation and excessive wealth accumulation.

There is little reason why the capital gains of the rich — be they in property or other investments — should not be taxed while the incomes of the middle-class are. Capital gains taxes would also correct the perception prevalent amongst many working adults in Singapore today that it is much more financially rewarding — particularly from a tax perspective — to focus their energies on asset speculation rather than traditional work.

Similarly, in Singapore there is a strong case for taxing the dead. They have accumulated their wealth over decades partly because they have lived in an efficient economy that works — a product of collective action by many people.

Some worry that estate duties might lead to capital flight. Yet wealthy people choose Singapore for many reasons, including business convenience and family safety.

An alternative to estate duties is an inheritance tax, which assesses beneficiaries rather than the estate of the deceased, and can be easier to administer and collect, particularly when assets are held abroad.

How should the poor be helped?

In keeping with the Singaporean ethos of individual responsibility, wealth redistribution should not entail just crude cash handouts to lower-income people. Rather, it should be dominated by socially-productive investments that help boost the educational, employment and general life prospects of those without wealth.

Consider healthcare. Singapore currently spends 3-4% of GDP on healthcare — compared with an OECD average of 6-17%. Although low healthcare spending is defended as efficient vis-a-vis outcomes, there still exist numerous coverage gaps, such as a comprehensive national chronic care infrastructure, that should be plugged.

In terms of employment, there are many possible ways to boost the incomes — and hence, wealth-generating prospects — of those at the bottom end, including a minimum wage and wage subsidies, such as the Workfare Income Supplement (WIS) scheme. A more direct measure could include one-off payments to top up the CPF accounts of extremely poor Singaporeans above 65.

The point is to show that there are many possible ways for redistribution to occur in a socially-productive way, without severely denting the drive of low-wealth citizens. Singapore should disabuse itself of the notion that wealth redistribution necessarily leads to moral hazard among the poor.

Conclusion

For a start, Singapore needs to publish data on wealth inequality to allow for proper analysis. It is worth reiterating here that Singapore has one of the most wealth-friendly tax regimes in the world. This article is not arguing for a sudden lurch towards a giant redistributive state, but rather for a calibrated effort to build a more equal society. In order to preserve Singapore’s core tenets of individual responsibility, equality of opportunities and meritocracy, it is important that wealth inequalities be reduced.

If not, social tensions will surely rise. Testimony from the Committee of Inquiry into last December’s riots in Little India pointed to chronic discrimination against Indian workers as one reason why the alleged rioters got upset.

Wealth inequality feeds class consciousness and discrimination. Many of Singapore’s contemporary socio-economic tensions have the veneer of simple racism or xenophobia. Yet they are also rooted in dissatisfaction over wealth inequality and the perception that opportunities to survive — let alone succeed — are vanishing.

This opinion piece is a summary of a longer essay that you can read here. On March 4th 2014, Sudhir participated in a debate on Wealth Inequality on Channel News Asia, alongside Melanie Oliveiro and Tan Khee Giap. Click here to watch it.